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Saturday June 3rd, 2023

Sri Lanka tax-payers left guessing after latest tax upheaval

ECONOMYNEXT – Sri Lanka’s latest tax upheaval from the 2022 budget which has repeated a ‘super gains tax’ to penalize large firms and brought back a cascading turnover tax instead has left many tax payers guessing over their application.

Sri Lanka had to impose higher taxes to cover expenses after a steep cut in value added tax in 2019 without a sitting parliament de-stabilized state finances after the state was expanded from 17 percent of GDP to over 20 percent under an unusually statist ‘revenue based fiscal consolidation’ strategy.

Exporters are likely to face a non-recoverable turnover tax from the social security tax, unlike the earlier higher rate VAT which does not hurt external competitiveness. Price controlled industries like pharmaceuticals would also be squeezed.

Super gains tax ‘normalized

In the 2022 budget a ‘super gains tax’ where large companies are targeted with a windfall style tax was repeated retrospectively, normalizing an additional ‘regime uncertainty’ to the country’s policy framework which began in 2015, critics say.

Private firms and chambers had sought clarity from authority while some industry groups were engaged in intense lobbying to minimize the effects of some of the new taxes.

The 2022 super gains tax is to charge an additional 25 percent from large companies that earn more than 2.0 billion rupees in profits, where returns have to be filed by end November.

“The issues that are not clear at the moment is whether the tax will be applicable across the board for all companies irrespective of their tax rates,” Duminda Hulangamuwa Senior Partner and Head of Tax of Ernst and Young in Sri Lanka told representatives of the top German brands in Sri Lanka.

“There are companies with 14 percent (corporate income) tax rates, there are companies with 15 percent, there are companies with 18 percent and 24 percent.

“My presumption is that it will go across the board in order to get the 100 billion rupee revenue to all industries, unless there is a development to that.”

There are also companies which are exempt from taxes.

About 80 billion rupees extra had been spent on the Coronavirus vaccines which had benefitted everyone. However questions are being asked by Chambers and others why only a selected few are being made to pay and not everyone.

“That is a call the government has to make. I am ok with either, but that is what people are saying,” Hulangamuwa explained.

There was also no information if marginal relief would be given to companies in the borderline.

“For example someone at 2.0 billion and one would pay, and a person at 1999 would not pay,” Hulangamuwa said.

“So someone at 1999 would get away and someone at 2001 would pay. There is no marginal relief to a person becoming short of just one rupee.”

In larger business groups, companies get dividends. The dividends are taxed by the declaring company already. The profits are taxed and the dividends are taxed at 14 percent.

If the recipient company goes over 2.0 billion taxes will have to be paid again.

“I do not think those are issues that have been addressed yet,” Hulangamuwa said. “I think these are issues that have to be addressed by the government when enacting the law into implementation.

“Now the question is who wants to be in the billion rupee club?”

The Rule of Law

Companies who had earned two billion had already used them for re-investment for expansion based on existing law. Some have also paid dividends and bonuses to workers.

“So they do not have cash though the profits are there to pay the tax. So these are the questions that are coming up. There are no answers to be given at the moment. Some are being taken up by the Chambers etc, but the final solution I do not have as to how and what base the tax will be levied on.”

The lack stable laws bring in what economists call ‘regime uncertainty‘, undermining rule of law, which analysts have said is one of the three biggest drawbacks the country faces along with monetary instability and nationalism.

“Nothing distinguishes more clearly a free country from a country under arbitrary government than the observance in the former of the great principles known as the Rule of Law,” explains economist Friedrich von Hayek, in his work The Road to Serfdom.

“Stripped of technicalities this means that government in all its actions is bound by rules fixed and announced beforehand – rules that make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.

“Thus, within the known rules of the game, the individual is free to pursue his personal ends, certain that the powers of government will not be used deliberately to frustrate his efforts.”

“Hence the familiar fact that the more the state ‘plans’, the more difficult planning becomes for the individual.”

The super gains tax was introduced by the ousted ‘Yahapalana administration’ which pushed up state spending through a 100 day program and it has now opened a pandora’s box of uncertainty for large companies. It was then promised to be one time.

An extra 3 percent tax was charged on banks calling it the financial VAT replacing a removed 3 percent Nation Building Tax.

“So they pay the NPB back as a VAT on financial services.”

Banks are likely to pay around 70 percent in taxes for the last financial year.

Changes to the VAT was only in respect to donations made to government.

In most European countries VAT was close to 20 percent and in Sri Lanka it has been brought down to 8 percent from an earlier 15 percent as part of the sudden tax changes in 2019.

However VAT is neutral for exporters and does not hurt export the global competitiveness of export industries or services.

Cascading NBT returns

In the budget for 2022 another new tax had been brought calling it the ‘social security contribution’ at 2.5 percent.

“This is similar to the Nation Building Tax that was abolished last year. It was a tax on turnover, and this will also be a tax on turnover, except that the rate is half a percent more.

He said clarity was being sought on the tax base and on exemptions.

“When a tax is introduced we find a lot of people lobbying for their industry,” he said. “It will directly after the bottom line. You do not keep 2.5 percent on bottom-line.

“The retailers, the distributors, low margin companies, bunkering and price controlled industries like pharmaceuticals they are unable to increase their prices because of the 2.5 percent.

“I believe the government will give relief to the industries that are at a low margin level.”

Analysts say cascading taxes will generally result in higher prices.

“The next of course is exporters,” he said. “They are screaming saying that 2.5 percent under current circumstance where margins are challenging, markets are challenging that they cannot afford to pay the 2.5 percent.

“So, all these matters had been discussed with relevant government officers – the Treasury especially. And I believe there will be some relief and these matters will be addressed as we go along.” (Colombo/Nov28/2021)

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Sri Lanka to ramp up weekend fuel deliveries after petrol price cut

More deaths reported at Sri Lanka fuel queues

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Petroleum Corporation will be operating on the weekend to complete all fuel deliveries to end vehicle queues forming outside fuel stations after the price revision earlier in the week, Energy Minister Kanchana Wijesekera said.

“Instructions have been given to CPC and Ceylon Petroleum Storage Terminals to continue fuel deliveries on Saturday and Sunday this week to supply sufficient stocks to all fuel stations,” Minister Wijesekera said in a TWITTER.COM MESSAGE

“To reduce expenses on overtime, CPC and CPSTL have not been operating on Sundays and public holidays in the last 4 months,” Wijesekera said.

“Non-placement of orders by fuel stations from last Saturday, anticipating a price reduction, not maintaining minimum stocks, immediate increase in demand by consumers after the price revision, and quota increase have created shortages in the fuel stations.”

The Minister in April 2023 said all fuel stations would be required to maintain a minimum of 50 percent of stock tank capacity.

“I have asked CPC to review and suspend the license of fuel stations that had not maintained minimum stocks.” (Colombo/ June 02/ 2023)

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Sri Lanka bonds yield up at close, rupee at 291.75/292.50 against the US dollar

ECONOMYNEXT – Sri Lanka’s bonds closed steady on Friday, dealers said, following the central bank’s decision to cut its main policy rate by 250 basis points.

The Spot US dollar closed at 291.75/292.50 rupees, dealers said.

The rupee opened at 290.25/75 to the US dollar Thursday and closed at 292.50/295.50 to the US dollar.

A bond maturing on 15.09.2027 closed at 24.70/90 percent up from 24.50/90 percent a day earlier, dealers said.

A bond maturing on 15.05.2026 closed at 25.75/26.25 percent up from 25.00/26.00 percent a day earlier.

A bond maturing on 01.05.2025 closed at 27.00/30 percent, up from 26.30/27.00 per cent at last close.

A bond maturing on 01.07.2032 closed at 20.25/21.00 percent, up from 20.00/40 per cent at last close.
(Colombo/ June 02/2023)

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Sri Lanka’s shares edge up on positive macroeconomic sentiments

ECONOMYNEXT – Sri Lanka’s shares closed higher in trade on Friday, over positive macro-sentiments encouraging investors to redeem their interest towards buying, an analyst said.

The main All Share Price Index was up 0.72 percent or 62.19 points to 8,753.80,  while the most liquid index S&P SL20 was up 0.68 percent or 16.87 points to 2,487.29.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

Prior to the Monetary Policy investors were quite optimistic that inflation is to lower and interest rates will decrease and since exp, an analyst said.

Sri Lanka Central Bank is waiting for the government proposal on the domestic debt restructuring (DDR), the central bank governor Nandalal Weerasinghe said amid uncertainty over DDR and speculations over instability in the banking sector.

“On debt restructuring, the borrower is the ministry of finance’s treasury. Certainly we will announce what the strategy will be. We are waiting for a government proposal,” Weerasinghe said.

Sri Lanka’s investors are waiting on assurances to be made on debt restructuring and optimization, Central Bank Governor Nandalal Weerasinghe said, “It is up to the government to clear the uncertainty, because from our side we have done that part.”

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

The speculation of DDR has hit the market and the risk premium has kept the market lending rates well above the central bank’s policy rates. The government has yet to present its plans on DDR.

Weerasinghe said the central bank has done its best to reduce the risk premium through bringing down the market lending rates while keeping the policy rates unchanged.

Sri Lanka’s President Ranil Wickremesinghe has discussed progress of International Monetary Fund program and debt restructuring during a visit of Deputy Managing Director Kenji Okamura, statement said.

“The discussion primarily focused on the progress of the IMF program between Sri Lanka and the IMF,” a statement from President’s office said.

“Attention was also paid to the on-going debt restructuring negotiations.”

However Officials from IMF have said Sri Lanka has to focus on expanding taxes.

“We discussed the importance of fiscal measures, in particular revenue measures, for a return to macroeconomic stability,” Deputy Managing Director Kenji Okamura said in a statement.

The finance ministry this week issued rules requiring everyone above 18 year of age to register to pay income tax.

“I was encouraged by the authorities’ commitment to negotiate a debt strategy in a timely and transparent manner.

The market generated a revenue of 738 million rupees, while the daily average was 1 billion rupees.

Top gainers in trade were Vallibel One, LOLC Finance and Browns Investment. (Colombo/June02/2023)

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